Alexander Corp. will pay a dividend of $4.20 next year. The company has stated t

Question

Alexander Corp. will pay a dividend of $4.20 next year. The company has stated that it will maintain a constant growth rate of 4.50 percent a year forever.

Requirement 1: If you want a 15 percent rate of return, how much will you pay for the stock? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Current stock price $

Requirement 2: If you want a 11 percent rate of return, how much will you pay for the stock? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Stock price = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

At 15%:

Stock price = D1÷(r-g)

= $4.2÷(15%-4.5%)

= $40

At 11%:

Stock price = D1÷(r-g)

= $4.2÷(11%-4.5%)

= $61.76

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